Business Time

INTRODUCTION

Investments decisions may vary from person to person. We have wide range of investment avenues ranging from physical assets to financial assets. In financial asset bank deposit, post office deposits, company deposits, insurance, equity shares, bonds and debentures of many kinds, venture capital funds and mutual funds are the major ingredients. Mutual funds offer wide rang of services to the investing community. It has lot schemes in the form of debt, balanced, growth, income, dividend, equity, sector specialized, fund of funds, gold and real estate through open ended and close ended mode. The savings pattern also paves the way from saving either lump-sum method or systematic investment method. While someone might want to plan for his children’s education, life after retirement, buying a property etc., someone might be saving for a vacation abroad or buying a luxury car etc. With objectives defying any range, it is obvious that the products required for investments to meet these objectives will vary as well. Investors saving for the proverbial rainy day may warrant for more secured avenues of investment while others may give more weight age to just returns.

RISK APPETITE

Mutual Funds though still at a nascent stage in India offer a plethora of schemes and serve broadly all type of investors. The range of products cover all kinds of risk classes – the high risk and high return class, the medium risk and medium return class and the low risk and low return class. There are also funds meant exclusively for young and old, small and large investors. It has plenty of vacuum places to go. Moreover, the setup of a legal structure, which has enough teeth to safeguard investors’ interest, ensures that the investors are not cheated out of their hard-earned money.

RISK TAKERS

Risk takers would not be averse to investing in high-risk avenues. Capital markets find their fancy more often. Though the risk associated is generally on the higher side of the spectrum, the return-potential compensates for the risk attached. However, a single person can’t invest in multiple high-priced stocks for the sole reason that his pockets are not likely to be deep enough. This limits him from diversifying his portfolio as well as benefiting from multiple investments. Stock picking requires great skills including thorough understanding of the corporate world and the economy.

RISK NEUTRALS

Risk neutrals partly ready to take risky investments and partly they want safe in their investments. The schemes like balanced funds and monthly income plans provide an easy route of investment. Armed with the expertise of investment techniques, they can invest in equity as well as good quality debt thereby reducing risks and providing the investor with better returns than he could otherwise manage. Since they can reshuffle their portfolio as per market conditions, they are likely to generate moderate returns even in pessimistic market conditions.

RISK AVERTERS

Risk averters never ready to take risky investments. The low risk and low return products suit them well. The industry offers host of products in the form of Liquid schemes, Floaters and Debt funds. Though debt funds may give negative returns in case of rising interest rate regime, floaters and liquid funds are zero-risk investments. Banks and corporates find these funds highly useful for parking their funds for a short term. This risk of default by any company that one has chosen to invest in can be minimized by investing in mutual funds as the fund managers analyze the companies’ financials more minutely than an individual can do as they have the expertise to do so. They can manage the maturity of their portfolio by investing in instruments of varied maturity profiles. Since there is no penalty on premature  withdrawal, as in the cases of fixed deposits, debt funds provide enough liquidity. Moreover, mutual funds are better placed to absorb the fluctuations in the prices of the securities as a result of interest rate variation and one can benefits from any such price movement. Other than the classification based on risk-return framework, mutual funds also offer funds focused at a particular section of the society. Specific goals like career planning for children and retirement plans are also catered to by mutual funds.

FOCUSSED APPROACH ON FUND DESIGNING

Children funds have found their way in a big way with many of the fund houses already having launched a children fund. Essentially debt oriented, these schemes invite investments, which are locked till the child attains majority and requires money for higher education.

Besides this, if the objective was to save taxes, the industry offers equity linked savings schemes as well. Equity-based funds, they can take long-term call on stocks and market conditions without having to worry about redemption pressure as the money is locked in for three years and provide good returns. Some of the ELSS have been exceptional performers in past and cater to equity investor with good performances.

The appeal of mutual funds cuts across investor classes. It is time that investors assess their risk appetite and make intelligent decisions to generate better returns and mutual funds are definitely one of the ways to go about it this very fact has prompted me to draft this paper considering the investing habits of young people. The younger generation generally has a good amount of disposable income and little responsibilities in terms of providing for the family, but their inquisitiveness to invest judiciously has been found to be wanting. Even my colleagues who are young people in their late twenties and early thirties who thoroughly understand the advantages of mutual funds have been found wanting on this account. What is surprising is that the fact that the only mutual fund investment most of them have ever made is in ELSS schemes with a view to avail tax breaks.

START EARLY, INVEST REGULARLY, EARN WISELY

Every investment option will at some point of time will be more attractive than the others because of the prevalent economic, capital markets or political scenario and though mutual funds as an investment vehicle has outperformed others classes over the long term, it is the habit of starting early and investing regularly that matters more. Others facets such as investment choices, asset allocation patterns, financial planning and constant reviewing of the portfolio follow thereafter. The most important variable in the above example is not the growth rates, or the amount of money, but the number of years, which young people have plenty ahead of them. For a country like India which has very favorable demographics and is predicted to have the highest percentage of young people, the potential is immense. Now with the merits of early investing established, youngsters can look to build a portfolio over a period of time, which is in sync with their changing risk return appetite over the years, and what product suits them best. A rough investment guideline for a young executive can look like this; firstly, an individual can look to start with insuring himself, as policies at early age are comparatively cheaper. Now, with basic life cover needs met, rest of the disposable income can be put in investment which are more aggressive in nature, and have the potential to deliver above average growth rates – that’s where mutual funds have great potential as they are proven long term performers – secondly, at later stages, more insurance cover may be required keeping in mind the added responsibilities and investments may be put into less aggressive funds. That’s where professional help of financial planners can be sought as there is no common formula which works for all.

Therefore, people who have just started working, or are in the early phases of their career and have little responsibilities should by all means continue to earn more – spend more, but should also take time out to think about investing the disposable money, which will help them in future to lead a comfortable and secured life.

Here again, investing through the Mutual Fund route enables an investor to invest in many good stocks and reap benefits even through a small investment. This not only diversifies the portfolio and helps in generating returns from a number of sectors but reduces the risk as well. The investor also gets the benefit of professional fund management. Even within the equity funds category, we have various types of funds to catering to the varying risk appetite of the sector funds. The industry would soon be able to offer Commodity funds and real estate funds as well.